Sighs of relief all round…but is that appropriate?

To say that the latest Rendez-vous occurred at an interesting time, is probably an understatement- not one US-landfall hurricane, but two (and with potentially significant levels of insured losses), and the “record-breaking” (and not in a good sense!) Equifax data breach.

Of course, the outcome of Hurricane Harvey in particular could have been far worse- not many miles to the east and it could have made Hurricane Katrina look like a mere Tropical Storm in comparison.

Such events demonstrate, of course, that, as evidenced by the volatility in the share prices of many publicly-quoted (re)insurers, writing property CAT business tends to produce moments of sheer panic amidst long periods of calm; while many (re)insurers are probably thankful that individual line sizes on cyber covers are still not that large.

So, the “profit warnings” for the publicly-quoted (re)insurers have begun, with Munich Re bravely going first, even though its management can have no accurate way of knowing with any certainty exactly how great the impact of recent events will be on its P&L and hence capital account. However, it would be fair to say that those companies which focus heavily on property CAT and BI covers are going to have a poor end to the year, as their “catastrophe budgets” will be significantly exceeded after years of relative calm.

Given that aggregate Insured Losses could easily be in the USD 40 to 50BN range (estimates at present are simply just that), and the combined storms are up there with (or exceed) Katrina in terms of their economic impact, it still strikes us as astonishing that no-one is yet comfortable predicting a truly hardening market in the most affected product lines- merely conceding that that the decline in pricing may (may) finally come to an end, with perhaps a modest uptick. The January 1st renewal season will be interesting.

Simply put, there remains too much capital and too many enterprises chasing not enough premium and demand; and the fact that many Combined Ratios are likely to go over 100% for 2017 evinces barely a shrug, as long as everyone is suffering at the same time. The concept of a “catastrophe budget” is in some ways an odd one. If catastrophes can truly be modelled with a reasonable degree of certainty, should the “budget” not take account of that probability and reflect it in pricing and hence premiums? Perhaps there needs to be a new category introduced of a “tail-CAT”- i.e., an event of a scale that truly is exceptional: hard to model; and for which capital does what it is supposed to do, which is absorb unexpected losses. If it is in the “budget” it should be in the pricing!

Awbury’s core business remains providing its clients with protections against material, “tail” credit, economic and financial risks (E-CAT). Therefore, our success depends and will continue to depend on designing bespoke products, and achieving pricing that far exceeds the risks posed by the tail events covered, thereby generating large, scalable premiums flows which are not correlated with, nor impacted by NatCAT events.

Of course, the fact that we operate outside the commoditized realm and are value-added price setters, does help; although we would never be so foolish as to believe that we can never be wrong- but we have capital for that!

The Awbury Team

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